Conspiracy of Fools (32 page)

“We have been undeniably clear in our concerns about your research effort,” Fastow continued. “Our decision here is intended to send you guys a message about how viscerally we feel.”

Speaking calmly, Fastow railed about how allowing Merrill a role would effectively endorse Olson’s judgments.

“Are there any concerns about the quality of our investment-banking effort?” Tilney asked.

“Not at all. We don’t want to harm our investment-banking relationship with Merrill, and we’ll be directing some future business your way.”

He paused. “This decision has been made solely on the basis of our concerns about the research coverage.”

Tilney let that sink in. “All right. I hear you.”

Two days later, at 8:30 in the morning, Ken Lay was at his desk when the phone rang. His secretary answered, then put the call on hold. “Herb Allison from Merrill Lynch is on the line.”

Lay smiled as he reached for the phone. Allison was president of Merrill Lynch in New York. Apparently, Enron’s shot across the bow had hit its target.

“Herb,” Lay said jovially, “good to hear from you.” And the dance began.

On a Monday in April, Jeff McMahon arrived at Enron to start his new job as treasurer. Right off, something seemed wrong. His new colleagues looked on him with suspicion. They were evasive when he asked about their duties. Nobody seemed to want to explain anything.

After a few hours of getting the runaround, McMahon was flummoxed. He had assumed he would get a quick handle on the operation’s structure, but none of it was clear. Everybody did everything; it was all sharp elbows and jockeying for a place on the latest deal. From what he could tell, banks were barraged with deal proposals, with no one coordinating the contacts. The commercial units had no finance executives; Fastow had taken them all, without establishing lines of authority. No one was in charge.

McMahon cornered Ray Bowen. The two men went into a conference room, and McMahon handed Bowen a marker.

“Listen, I’m trying to understand the organization,” McMahon said. “Can you just draw it for me? Who’s in what box, who reports to who, like that.”

Bowen laughed.

“Sorry, Jeff,” he said. “I don’t think there are boxes where people fit in. It’s pretty much catch-as-catch-can. Everybody’s just trying to get in on the next deal.”

After reviewing the chaos, McMahon sought out Fastow.

“Andy, you’ve got to organize this thing,” McMahon said. “People are all fighting. You’ve got a lot of animosity between the commercial divisions and the corporate guys, and, really, you’ve got to shift people back into the divisions to make things work better.”

Fastow considered that for a moment. “Okay, fine, whatever. Just leave me out of it as much as possible. I really don’t like dealing with organizational issues.”

McMahon started reorganizing finance, shifting executives back to the commercial units. At the same time, he created strong definitions for everyone’s job. But he also came away with an important lesson. Enron’s new CFO wasn’t much interested in managing. He was just a deal guy.

The faxes from Schuyler Tilney of Merrill Lynch started arriving in the late afternoon of April 28.

The firm had begged its way back onto Enron’s stock offering and had reached an unspoken understanding about the future of John Olson, the analyst whose muted enthusiasm for the company had started all the trouble.

For now, Olson was flogging Enron stock, calling institutional investors—dozens of them—about the stock offering. Whatever happened in each call—a message left, an interest expressed—Olson wrote it down. Then Tilney faxed the information to Fastow and Mark Koenig, Enron’s investor-relations chief. The message was clear. Merrill had reined in Olson. The firm was trying to be good.

At 11:15 on the morning of May 7, Rebecca Mark was standing in the doorway to Skilling’s office. He glanced up and smiled, inviting her in.

Skilling studied Mark as they spoke. As usual, she looked fabulous, in a blue suit with stiletto-heeled pumps. But now their odd relationship—locking horns in strategic battles while at times privately confiding in each other—was taking a new turn. The previous day, Enron had announced that Mark was no longer chief executive of Enron International. Instead, she was being kicked upstairs, to be vice chairman of Enron, and was turning over international to her longtime deputy, Joe Sutton.

No one—not even Mark—had any illusions about the authority in her new job; there was none. Enron already had another vice chairman, Ken Harrison, whose role was pretty much nonexistent. But Mark didn’t mind. She had no intention of remaining vice chairman for long.

As she spoke with Skilling, Mark couldn’t help but see the man who had confided his fears to her in the past. In truth, she worried about him. The people Skilling trusted, the ones he rewarded with outsize salaries and bonuses, were not looking out for him. Fastow, Causey, Rice—none would protect him from his own worst impulses.

Mark decided to say so. “You know, Jeff, if you’re going to run Enron, you need to move Joe Sutton to chief operating officer. You could trust Joe.”

Skilling listened in silence.

“Truthfully, Jeff,” Mark continued, “you can’t do that with the guys you’ve got around you. They’re a bunch of prima donnas. They’re all off doing their own thing and grandstanding, trying to get your attention.”

She paused. “Jeff, they’re not your friends. You need to protect yourself from them.”

Skilling blinked. “Well, those are the people I depend on. Those are the people who got me where I am.”

The conversation ended. Mark could tell that Skilling hadn’t heard a word she’d said. He was going to continue holding his lieutenants in his trust.

In London, Michael Kopper stepped into the lobby of the Metropolitan hotel, making his way past its pear-wood interiors. Young staffers clad in Armani suits ambled about, lending the place the chic aura it cultivated.

After a few minutes in the lobby, Kopper met up with Fastow, and the two headed outside. Across the street, Hyde Park was in bloom, while to the southeast the springtime splendor of the Buckingham Palace Gardens was emerging. They climbed into the back of a car, telling the driver to take them to an address near the House of Parliament.

It was May 19, just after eight o’clock in the morning. Fastow and Kopper had arrived the previous morning in London as part of a wide-ranging world tour to meet Enron’s bankers. But in London they would be getting together with executives from only one bank, Greenwich NatWest, a unit of National Westminster.

Fastow already had plenty of reason to feel good about the bank. It was rated by Enron as Tier 1, signaling that these bankers would go the extra mile. Two months earlier, when Fastow was struggling to find thirty million dollars to finance an expansion of Enron’s Bammel gas storage field, Greenwich NatWest stepped up; its bankers made clear that they were only doing the deal as a favor.

The car pulled up to 4 Millbank. Kopper and Fastow hopped out, heading upstairs to Enron’s London offices. About an hour later, five bankers from Greenwich NatWest arrived. No introductions were necessary; they had all met the night before over drinks.

One executive they had known awhile—Kevin Howard, who handled the bank’s relationship with Enron. For this meeting, Howard had brought along the big guns, including the co-chief executive, to drive home the bank’s interest in doing business with Enron. But it was two other bankers at the meeting who most intrigued Fastow and Kopper.

One, Gary Mulgrew, had grown up in a middle-class Scottish home but
was now renowned as the hard-charging director of the bank’s structured-finance business. The other, Giles Darby, was lower-key but struck colleagues as the smarter of the pair, a man who often hid his intelligence behind the demeanor of an English country boy. They were almost the mirror image of Fastow and Kopper—an aggressive boss, a smarter colleague, and both on the lookout for the edge to make them rich.

“You recover from last night?” Mulgrew said with a laugh.

Fastow smiled. “More jet lag than anything else.”

The group settled in. As the meeting wore on, Fastow and Kopper felt increasingly comfortable with Mulgrew and Darby. They knew how the corporate-finance game was played. Maybe, in time, they could do some special deals together.

John Olson was stunned.
Fired
. He was being fired.

It was the next day, May 20. As Fastow flew around Europe, Merrill was taking its final action to appease him back in America. Andrew Melnick, from Merrill’s research division, let Olson know the news. He was too negative on Enron, Melnick said. He had made snide remarks that had offended Lay. He was hurting the firm. He had to go. Merrill would be good to him, though, and pay him $400,000—more than twice his annual salary—to leave quietly.

Olson scarcely knew what to do. He had never been snide about Enron in front of Lay or anybody else. His stock picks outperformed Enron. What was he doing wrong?

The timing couldn’t have been worse. Olson and his wife had just closed on a house a few days before. They could never afford it now. This was a financial disaster.

Maybe, he thought, there was still a chance. Maybe if Lay told Melnick that there were no snide remarks, maybe he could stay. Olson reached for the phone to call Lay.

Everyone at Enron was feeling flush.

The company’s stock offering had been a hit. More than seventeen million shares sold at fifty dollars each, bringing in $800 million in new cash. Enron now had the chance to cut back its debt. But the rating-agency concerns that had inspired the offering seemed forgotten.

If Enron could raise so much money so easily, what was the problem? Surely the company could do it again, whenever it wanted. Thoughts of any concerted effort to clean up the balance sheet were shelved. Instead, Enron set out on its biggest spending spree ever.

———

Rebecca Mark and Cliff Baxter set down a thick report on the circular conference table in Ken Lay’s office. For months, the two had been working on an idea, something so radical they felt it could redefine Enron’s future.

Water
. Enron would do for water what it had done for energy. Under Mark’s prodding, it had already tossed $300 million into a water company. Now it was time to go for broke, by starting a whole water division.

“Water is going to be huge, Ken,” Mark said.

Lay sat back. “All right. Tell me about it.”

Baxter took it from there. The market was worth some $300 billion and would grow to $400 billion by 2000. “It’s largely government-owned,” he said. “But it’s going through privatization. We’d be using a lot of the same skill sets we used in energy, just with a lot less competition.”

There was a global shortage of usable water, Mark said. As world economies improved, demand would grow. International markets were opening
now;
Enron had to get in fast. Opportunities were everywhere—Britain, Germany, Brazil, even the United States. There were synergies with energy and lots of opportunities for the kinds of creative financial engineering Fastow did so well.

What did Skilling think of the idea? Lay asked. Baxter replied that he had spoken with Skilling and received, if not a green light, then at least a yellow.

Lay was impressed; the two made a strong case. And Enron
had
been so successful at its other gambles, it certainly seemed like water was something to consider.

“Well, Rebecca, Cliff, this was an excellent presentation,” Lay said. “And based on what you’ve shown me, I would be happy to take it to the board.” Mark smiled. “Wonderful.”

On June 3 at about 7:45 in the morning, Amanda Martin walked through the lobby of the Warwick Hotel in Houston. The place was stodgy but elegant, with the decor of a European château. She made her way to the Hunt Room, walking beneath chandeliers in the shape of hunting horns.

By then Martin was struggling. Over the past year, everything had come off track. Her romantic relationship with Ken Rice had fallen apart. One underling she had passed over for promotion had sued, claiming Rice backed the decision because of the affair. Their poor judgment had left Enron vulnerable, but only Martin paid a price. She was the subject of vicious gossip, mostly by traders.

She wanted distance from Rice, wanted out of the brutal environment inside Enron. Now Skilling had an idea and wanted to discuss it
over breakfast. The two met at a table. After ordering, Skilling leaned toward her.

“I want you to do me a favor,” he said.

Rebecca Mark was launching a water business, he said. This wasn’t going to be just another division; it would eventually be a public company, with Mark in charge.

“I need somebody there I trust,” he said evenly. “Somebody who understands how Enron works, somebody with a track record in building businesses and fixing problems. And I want somebody I’m comfortable communicating with.”

To Martin, it sounded like salvation.

“I’m interested, Jeff,” Martin said.

“We’re going to take the best of Enron and leave the worst behind”

Martin listened, enthralled, as Mark laid out her vision of a water business that would be a kinder, gentler version of Enron. No more competitive backstabbing. No quarter-to-quarter battles. The Performance Review Committee, or PRC, where everyone fought for promotions and bonuses, would be gone. No benefits for politicking; the water business would be a meritocracy.

“We’re going to build a business,” Mark said, “where you can be rewarded for being nice, too.”

The vision captivated Martin. She was on board.

Over time, she and Mark discussed the business. First thing, it needed a name. Martin pulled a face at Mark’s first idea—Water Mark. A little too egocentric. But eventually a name was found, a name that they knew could change the nature of business: Azurix.

His chin in one hand, Skilling flipped to the second page of a report on another proposed international deal, this one in Brazil. He sat at the circular conference table in his office, his back to his desk, as he listened to Joe Sutton, the new division head, make the pitch.